Modeling the relationship between corporate strategy and wealth creation using neural networks

In this paper, we hypothesize that there is a non-linear relationship between corporate strategy, short-run financial variables, and wealth creation measured as market value added, and use neural networking to model this relationship. The neural network model accurately categorized over 90% in the training set and nearly 93% of firms in the holdout test sample. Additional analysis revealed that strategy variables were particularly effective predictors of an upward trend in wealth creation whereas short-run financial variables were more effective in predicting a downward trend, or wealth destruction. Neural networks outperformed discriminant analysis in predictive ability in all analyses, suggesting the presence of non-linear effects. This research represents a first attempt to use neural networking to model the relationship between corporate strategy and wealth creation.